How Co-Debtors are Protected in Bankruptcy
Filing bankruptcy will not only provide protection to the debtor filing bankruptcy; but may provide protection to their co-debtors under certain circumstances.
Below we explore when and how co-debtors are protected in bankruptcy:
What Is A Co-Debtor?
A co-debtor is someone who is equally obligated for a debt owed by the bankruptcy debtor. For example, a co-signer or joint account holder might be considered a co-debtor for the purposes of bankruptcy.
Chapter 13 Bankruptcy
Co-debtors will receive automatic stay protection if the bankruptcy debtor has filed Chapter 13 bankruptcy . The good news is that the co-debtor will not be pursued by creditors for the duration of the debtor's Chapter 13 bankruptcy case. This means that as long as the bankruptcy debtor makes payments through their Chapter 13 bankruptcy plan, their co-debtor will not face collections actions.
One good example of how a co-debtor receives automatic stay protection in bankruptcy is when the co-debtor is a co-signer on credit card debt. As long as the bankruptcy debtor makes payments through their Chapter 13 bankruptcy, the co-signer will not need to pay on the debt. However, once the case is dismissed because the bankruptcy debtor failed to continue payments, the co-signer loses automatic stay protection. It's important to note that if a Chapter 13 bankruptcy plan does not provide full payment on a debt which has a co-debtor, the creditor may pursue the co-debtor for payment after the discharge.
Applying Automatic Stay Protection
The bankruptcy courts have ruled that only consumer debts receive co-debtor automatic stay protection. Tax debts are not considered consumer debts. So if a married couple filed taxes jointly and have tax debt, the non-filing debtor will not receive automatic stay protection in bankruptcy. It's also important to note that business debts will not receive co-debtor automatic stay protection.